December 3, 2020/Proshare
by FBNQuest Research
12% increase to price target driven by 650bp cut in risk-free rate to 6%
Barring a significant positive earnings surprise in Q4, we expect Zenith to come in below its ’20f PBT guidance of NGN253bn. Nonetheless, on our new forecasts, we expect the bank to deliver a ’20f ROAE of c.22%, in line with management’s ROAE guidance. Relative to our forecast, Q3 PAT missed by low single digits. Consequently, we have cut our ’20f EPS forecast by c.-4%. However, the cut to our ’21f EPS forecast is greater at -18% because of a -10% reduction to our non-interest income forecast.
We expect non-interest income to remain volatile over the next few quarters, largely because of fx revaluation gains stemming from pressure on the naira. Our revised ’21f non-interest income forecast excludes the fx impact. Despite the downgrades to our earnings forecasts, our new price target of NGN53.5 is c. 12% higher because we have lowered the risk-free rate driving our valuation model to 6% from 12.5% previously. Having grown its loan book by 3% q/q, Zenith’s ytd loan growth of 18% is ahead of its 10% FY ’20f guidance.
Consequently, we have increased our ’20f loan growth assumption by 400bps to 19%. Our new forecasts translate to a ’20f PBT forecast of c.NGN238bn, implying a -2% y/y decline, and c.6% lower than guidance. Thanks to solid deposit growth of 7% q/q which outpaced a 3% q/q loan growth, Zenith’s liquidity ratio improved to 67.4% – one of the highest within our coverage universe – from 50.8% in Q2. The shares are trading on a ’20f P/B multiple of 0.7x for 17.9% ROAE in ’21f.
We believe that the discount that the market has placed on the shares relative to rivals like GT Bank (1.3x P/B for 22.7% ’21f ROAE) is excessive. Having shed c.15% since its recent peak on 12 Nov ’20, we believe that the current valuation should justify a more positive view. Our new price target of NGN53.5 implies a potential upside of 123% from current levels. We keep our Outperform rating on the stock.
Q3 PBT down 2% y/y due to a 21% y/y spike in opex
Q3 ’20 PBT declined 2% y/y, driven by a 21% y/y spike in opex. The negatives from the opex line offset a 5% y/y increase in pre-provision profits and a -74% y/y reduction in loan loss provisions. In terms of revenue drivers, non-interest income grew by 21% y/y. The double-digit growth in non-interest income was underpinned by increases of 15% and 111% y/y in T-bills and bond trading incomes respectively over the 9M ’20 period.
In contrast, funding income fell by 6% y/y. Below the tax line, the y/y decline in PAT widened to 11% because of a higher tax rate of 12.1% (vs 4.1% in Q3 ’19). Sequentially, PBT advanced by 14% q/q on the back of a 94% y/y reduction in loan loss provisions. In contrast, PAT fell by -13% q/q because of an 850bp q/q increase in the tax rate.